Green payment programs, asymmetric information and the role of fixed costs

Many conservation programs offer financial compensation to farmers in exchange for socially desired services, such as soil conservation or biodiversity protection. Realization of the conservation objective at minimum cost requires payments to just cover the extra costs incurred by each individual (type of) farmer. In the presence of information asymmetries regarding costs, incentive-compatible contracts can be designed to mitigate excess compensation, but these typically only provide partial improvement because of several distortions. We argue that these distortions are inevitable only if all conservation costs are variable in nature. If there are fixed costs too, we find that the least-cost solution can be incentive compatible. We identify the exact conditions under which these maximum savings can be obtained and conclude that, given the relevance of fixed costs in conservation services provision, incentive—compatible contracts deserve a second look.

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 Record created 2017-04-01, last modified 2017-08-25

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